IAG keen to capitalise on hybrid rush

The wave of new listed debt securities is one of the few bright spots in the stockbroking sector,
Insurance Australia Group
being the latest to capitalise on the robust retail demand for high-yielding investments.

The general insurer wants to raise about $350 million through a hybrid issue that would pay four percentage points over the 180-day bank-bill swap rate, which is trading near 4.5 per cent.

The issue will take the total amount of recent hybrids to about the $4 billion mark, and this doesn’t include corporate bonds or fixed-income exchange-traded funds, which have also grown in popularity.

“There has been a steady improvement in the breadth and depth of that market over the past three years," said Evans & Partners’ chief investment officer, Mike Hawkins.

“I imagine that if you asked most stockbrokers, [they would say] the proportion of their business coming from fixed interest would be increasing."

This growing trend is not unprecedented. Fixed interest securities used to make up a large part of most stockbroking operations in the 1980s, although that part of the business fell away a decade or two later as the margins brokers made from fixed-interest shrank and investor bias towards equities dominated.

“I think from an industry perspective, a lot of skill and capacity disappeared across the broking industry," said Mr Hawkins.

The chief executive of Octa Phillip Financial Group, Paul Masi, believes the re-emergence of debt securities is positive for the industry, but he doesn’t believe it will be enough to offset the waning interest in equities.

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“I don’t think fixed income is the saviour of the industry," said Mr Masi.

“This is because most fixed-income investments are modelled on ‘buy and hold’ [strategies] and we don’t find people trade fixed-income securities per se."

There are also signs of market indigestion after the flood of hybrid issues as many hybrid securities trading on the secondary market have performed poorly, explained Mr Masi.

However, the real opportunity could come from dispensing advice as to which debt security to buy given the wide range of these investments and their technical complexity – such as redemption conditions, appropriate level of yields to compensate for risk and credit quality of the issuer.

Further, the factors driving equity performance are very different from those governing fixed-income investments.

“Ordinary equity has characteristics that are well understood and are well regulated," said Mr Masi.

“I think it is important that the investor isn’t abused in the process [of bringing back fixed income]."

This abuse could already be happening. Several market experts criticised issuers for taking advantage of retail investors by issuing hybrids paying yields that did not compensate for underlying risks or by putting in unfavourable conditions relating to the maturity of these securities.